As 2022 and 2023 have continued to be extremely tough years for the capital markets, many small-cap companies find themselves failing to maintain the minimum continued listing requirements. I’ve recently written about those continued listing requirements – see HERE – and Nasdaq’s proposed rule changes for reverse split notifications as companies struggle to maintain the $1.00 minimum bid price requirement – see HERE.
These blogs provide a perfect segue for a deep dive into the Nasdaq deficiency notice and delisting process. In this first blog in the series, I provide an overview of deficiencies, deficiency notices, cure periods and compliance plans. In the Part 2, I will review the hearing panel process followed by appeals and ultimately delisting.
Overview – Deficiency Notices
When the Nasdaq Listing Qualifications Department determines that a company does not meet a listing standard, it will immediately notify the company of the deficiency. The notification will come in letter format, literally within a day of a deficiency determination. Deficiency notifications are one of four types:
- Staff delisting determinations, which are notifications of deficiencies that, unless appealed, subject the Company to immediate suspension and delisting;
- Notifications of deficiencies for which a company may submit a plan of compliance for staff review;
- Notifications of deficiencies for which a company is entitled to an automatic cure or compliance period (generally 180 days); and
- Public Reprimand Letters – which are not available for late periodic filings or the failure to timely hold a shareholder meeting.
When a company receives a notification that allows for a compliance plan or cure period which is not successful, it may ultimately result in a delisting determination.
Both a deficiency and delisting notice will contain the following information:
- The factual bases for the staff’s determination and the quantitative or qualitative standard the company has failed to satisfy;
- Instructions regarding the company’s obligations to disclose the deficiency under Nasdaq rules (i.e., an 8-K or press release within 4 days of receipt of the notification with most companies filing an 8-K);
- One of the following depending on the type of notice: (a) Delisting determination – the date the company’s securities will be suspended; the right to request a review by a Hearing Panel; and that a request for review within 7 days will stay the suspension; (b) Deficiency requiring plan of compliance – the deadline for plan submittal; (c) Deficiency with automatic cure period – the expiration date of the cure period; and (d) Public Reprimand – an explanation of why the letter is appropriate and the company’s right to request review by a Hearings Panel.
Company Disclosure Obligations
A company that receives a notification of deficiency, Staff Delisting Determination, or Public Reprimand Letter is required to make a public announcement disclosing receipt of the notification and the rule(s) upon which the deficiency is based, and describing each specific basis and concern identified by Nasdaq in reaching its determination. Nasdaq allows notice to be made by either an 8-K or press release, but since Item 3.01 of Form 8-K requires an 8-K filing related to the receipt of a notice of delisting or listing deficiency, most companies only file the 8-K. However, if the notice resulted from the failure to file a periodic report required by the Securities Exchange Act, Nasdaq rules require both an 8-K and press release. The public notice must be provided to Nasdaq Market Watch 10 minutes before dissemination.
If the public announcement is not made by the Company within the time allotted or does not include all of the required information, trading of its securities shall be halted (if not already halted), even if the Company appeals Nasdaq’s determination. If the company’s failure to make this public announcement is the only basis for a trading halt, Nasdaq would ordinarily resume trading if Nasdaq itself makes the public announcement. If the Company fails to make the public announcement by the time that the hearings panel issues a decision, the failure to make the announcement will be added as a reason supporting delisting.
Deficiencies
Deficiencies Resulting in Immediate Delisting Determinations
Nasdaq may issue a notice of immediate delisting under the following circumstances (the list below does not include delisting events for ETS’s, REITs, trading subscription receipts or trading bonds):
- Failure to timely solicit proxies;
- A security that is in a 180-day compliance period for failure to meet the minimum bid price requirement and during such period has a closing bid price of $0.10 or below for ten consecutive trading days (note that a company will not be deemed deficient in the bid price requirement until its securities trade below the $1.00 minimum for 30 consecutive trading days);
- A security fails to meet the bid price requirement and has affected one or more reverse splits over the prior two-year period with a cumulative ration of 250-to-1 or more;
- A SPAC trading on the Nasdaq Global Market whose average market value of listed securities falls below $50 million or market value of publicly held shares falls below $40 million for 30 consecutive trading days. Note that Nasdaq will notify the company of this delisting standard if its market value of listed securities falls below $75 million or its market value of publicly held shares falls below $60 million; and
- Nasdaq has determined that continued listing raises a public interest concern.
Deficiencies that Allow a Company to Submit a Plan of Compliance for Nasdaq Review
Unless a company is currently under review by an adjudicatory body for a delisting determination, a company may submit a plan of compliance if it is deficient in one of the following:
- A quantitative standard that does not provide for an automatic compliance period including the stockholder’s equity, number of publicly held shares, number of public shareholders, revenue or asset requirements for the Nasdaq Capital Markets, Nasdaq Global Select and Nasdaq Global Markets respectively. For a review of these specific requirements, see HERE.
- Deficiencies related to independent board members or committee requirements where the rule does not provide for an automatic cure period or such cure period is otherwise not applicable under the circumstances;
- Deficiencies from rules related to: (a) shareholder meetings; (b) quorum; (c) related party transaction; (d) shareholder approval requirements; (e) auditor registration; (f) direct registration program; (g) code of conduct; or (h) voting rights;
- Failure to make disclosures related to third-party directors and nominee compensation or failure to make a board diversity disclosure; or
- Failure to file SEC periodic reports (no plan of compliance will be allowed for this if the company is currently under review for a delisting determination).
Plans for (i) through (iv) above must be submitted within 45 calendar days of a deficiency notice (with up to an additional 5 days with good cause) and plans for (v) within 60 calendar days (with up to an additional 15 days with good cause). If a company’s plan consists of transferring from the Nasdaq Global or Global Select Market to the Nasdaq Capital Market, the company should submit its application and the applicable application fee at the same time as its plan to regain compliance.
Nasdaq will not accept a plan of compliance related to revenue or asset deficiencies as these are generally historical in nature and require audited financial statements.
Upon submitting a plan of compliance, Nasdaq may either grant up to 180 days from the date of the initial notice to regain compliance, issue a delisting determination or issue a public reprimand letter. Where a compliance plan is granted related to delinquent SEC reports, the maximum time period will be 180 days from the due date of the first late report (though with a hearing panel this can be extended to a maximum of 360 days). Where compliance is granted with respect to an annual meeting, the maximum time period will be 180 days from the deadline to hold the annual meeting (one year after the end of the Company’s fiscal year).
The contents of a plan of compliance depend on the specific listing deficiency. However, in general, all plans of compliance should include the specific circumstances of the delinquency, likelihood of regaining compliance within the requested period, past compliance history, corporate events that may occur while delinquent, general financial status and disclosures to the market. Nasdaq will also consider third-party information such as from the audit committee, outside auditors, public information, SEC or other regulatory bodies.
The failure to regain compliance within a granted compliance period will result in delisting.
Deficiencies that Provide for an Automatic Cure/Compliance Period
Some Nasdaq ongoing listing requirements provide for an automatic cure or compliance period, including:
- Bid Price – if a company fails to meet the minimum bid price requirement for 30 consecutive trading days, it will receive a deficiency notice from Nasdaq providing an automatic 180-day cure period. Regaining compliance requires trading above the minimum price for 10 consecutive business days; however, Nasdaq has the discretion to require up to 20 days as discussed below under “Nasdaq Discretion Relating to Price Based Requirements.” During the 180-day period, a company that is trading on the Nasdaq Global Market may transfer to the Nasdaq Capital Market as long as it meets the market value of listed securities continued listing requirement and all of the applicable initial listing requirements other than the bid price requirement.
A company may request an additional 180-day compliance period if at the 180th day of the first compliance period, it meets the market value of publicly held shares continued listing requirement and all of the applicable initial listing requirements other than the bid price requirement. The company must also explicitly notify Nasdaq of its intent to cure, generally through a reverse split. If the company has publicly announced information (e.g., in an earnings release) indicating that it no longer satisfies the applicable listing criteria, it shall not be eligible for the additional compliance period.
As indicated above, a security that is in a 180-day compliance period for failure to meet the minimum bid price requirement and during such period has a closing bid price of $0.10 or below for ten consecutive trading days, will receive an immediately delisting determination.
- Market Makers – A failure to meet the continued listing requirement for a number of market makers shall be determined to exist only if the deficiency continues for a period of 10 consecutive business days. The company will then be provided with 30 calendar days to regain compliance. Regaining compliance requires having the minimum number of market makers for 10 consecutive business days.
- Market Value of Listed Securities – A failure to meet the market value of listed securities listing standard exists after a deficiency continues for 30 consecutive business days and allows for a 180-day compliance period. Compliance can be regained by meeting the applicable standard for a minimum of 10 consecutive business days during the 180-day compliance period however Nasdaq has the discretion to require up to 20 days as discussed below under “Nasdaq Discretion Relating to Price Based Requirements.”
- Market Value of Publicly Held Shares – A failure to meet the market value of publicly held shares listing standard exists after a deficiency continues for 30 consecutive business days and allows for a 180-day compliance period. Compliance can be regained by meeting the applicable standard for a minimum of 10 consecutive business days during the 180-day compliance period however Nasdaq has the discretion to require up to 20 days as discussed below under “Nasdaq Discretion Relating to Price Based Requirements.”
- Independent Director and Audit Committee Rules – If a company fails to meet the majority board independence requirement or the audit committee composition requirement due to one vacancy, or because one director ceases to be independent for reasons beyond his/her reasonable control, the company will have until the earlier of its next annual shareholders meeting or one year from the event that caused the deficiency to cure. If the company’s next annual shareholders’ meeting is held sooner than 180 days after the deficiency, then the company has 180 days from the event to cure. Moreover, a company can only rely on the cure period for one audit committee composition for one director at the same time.
- Diverse Board Representation – If a company fails to meet the diverse board composition or disclosure requirements, it will have until the later of its next annual meeting or 180 days to cure the deficiency.
Nasdaq Discretion Relating to Price-based Requirements
If a company fails to meet the market value of listed securities, market value of publicly held shares, bid price, or market value/principal amount outstanding requirements, each of which is related to the company’s security price and collectively called the “Price-based Requirements,” compliance can be regained by meeting the applicable standard for a minimum of 10 consecutive business days; however, Nasdaq has the discretion to require up to 20 days.
In determining whether to require additional compliance time to regain good standing, Nasdaq can consider all facts and circumstances, including: (i) the amount of time the company exceeds the applicable standard; (ii) trading volume (with low volume being a negative); (iii) market maker activity, including the number of market makers quoting at or above the $1 minimum price; and (iv) the trend of the security price (up or down).
Public Reprimand Letters
Nasdaq may issue a public reprimand letter when a company violates a corporate governance standard or fails to make or timely make a Nasdaq notification. In determining whether to issue the reprimand letter, Nasdaq will consider whether the violation was inadvertent, whether the violation materially adversely affected shareholders’ interests, whether the violation has been cured, whether the company reasonably relied on an independent advisor and whether the company has demonstrated a pattern of violations.
Nasdaq’s Discretionary Public Interest Authority – Rule 5101
In addition to the specific enumerated above, Nasdaq has broad discretionary authority over the continued listing of securities in order to maintain the quality of and public confidence in the market, to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and to protect investors and the public interest. Nasdaq may use such discretion to apply additional or more stringent criteria for continued listing of particular securities, or suspend or delist particular securities based on any event, condition, or circumstance that exists or occurs that makes continued listing inadvisable or unwarranted in the opinion of Nasdaq, even though the securities meet all enumerated criteria for continued listing.
Under its discretionary authority Nasdaq may also take issue with an officer, director or substantial shareholder. In doing so, Nasdaq can request that the individual resign, divest themselves of securities, terminate contracts or give up voting rights.
The Author
Laura Anthony, Esq.
Founding Partner
Anthony L.G., PLLC
A Corporate Law Firm
Securities attorney Laura Anthony and her experienced legal team provide ongoing corporate counsel to small and mid-size private companies, public companies as well as private companies going public on the Nasdaq, NYSE American or over-the-counter market, such as the OTCQB and OTCQX. For more than two decades Anthony L.G., PLLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker-dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions, securities token offerings and initial coin offerings, Regulation A/A+ offerings, as well as registration statements on Forms S-1, S-3, S-8 and merger registrations on Form S-4; compliance with the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers; applications to and compliance with the corporate governance requirements of securities exchanges including Nasdaq and NYSE American; general corporate; and general contract and business transactions. Ms. Anthony and her firm represent both target and acquiring companies in merger and acquisition transactions, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The ALG legal team assists Pubcos in complying with the requirements of federal and state securities laws and SROs such as FINRA for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the small-cap and middle market’s top source for industry news, and the producer and host of LawCast.com, Corporate Finance in Focus. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.
Ms. Anthony is a member of various professional organizations including the Crowdfunding Professional Association (CfPA), Palm Beach County Bar Association, the Florida Bar Association, the American Bar Association and the ABA committees on Federal Securities Regulations and Private Equity and Venture Capital. She is a supporter of several community charities including the American Red Cross for Palm Beach and Martin Counties, Susan Komen Foundation, Opportunity, Inc., New Hope Charities, the Society of the Four Arts, the Norton Museum of Art, Palm Beach County Zoo Society, the Kravis Center for the Performing Arts and several others.
Ms. Anthony is an honors graduate from Florida State University College of Law and has been practicing law since 1993.
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